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It's Just a Walk in the Park Sown With Land Mines: Taking Stock

Elena Popina
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It's Just a Walk in the Park Sown With Land Mines: Taking Stock

It's Just a Walk in the Park Sown With Land Mines: Taking Stock

(Bloomberg) -- Sahm Adrangi can tell you all about patience.

In January, the chief investment officer at Kerrisdale Capital said that Qualcomm would lose the Federal Trade Commission’s antitrust case, resulting in a halving of the firm’s licensing revenue, earnings and share price, and that he’s short the stock. Shares subsequently notched a 43% rise over the following four months. Then came the ruling from a California federal judge, which sent the stock 11% down in one session. Shares are down another 2.9% before the bell Thursday.

Adrangi’s bet on Qualcomm losing the legal fight was prescient, though his short call was four months early and, despite the recent collapse, the stock remains up 28% since then. But there’s little doubt the U.S. District Judge Lucy Koh’s ruling that the firm should change its licensing practices and renegotiate licensing agreements could lead to an even bigger correction as the firm’s current business model is upended.

What’s happening next? Qualcomm, which brought in more than $5 billion in licensing revenue last year, vowed to appeal the ruling, but the process can take months if not years. That raises a question about to what degree the Trump administration is willing to ensure the company remains competitive in the 5G technology, and is willing to interfere -- especially after Trump blocked Broadcom’s $117 billion bid for the chipmaker amid national security concerns.

At least three analysts have cut their recommendations on Qualcomm since Wednesday (Mizuho and DZ Bank to neutral and Edward Jones to sell). For bulls like Morgan Stanley’s James Faucette, an 11% dip is seen as a buying opportunity. Note when news broke that Qualcomm and Apple had settled their epic legal fight in April, Qualcomm rose 38% in the next two days.

Minutes’ Minutia

S&P futures are down 28 handles following losses in Europe and Asia after the Chinese Communist Party’s flagship People’s Daily published two commentaries assailing American moves to curb Chinese companies. Tesla is down 4.3% pre-market and is now trading at $184.50 - as Loup Ventures co-founder Gene Munster slashed his estimate for Tesla’s full-year global car sales by about 10%. Avon is up 15% as investors got an official confirmation that Brazil’s Natura Cosmeticos agreed to buy the firm.

Minutes released by the FOMC on Wednesday were exactly in line with what investors were expecting. Policymakers preached patience in moving rates in either direction, pushing back against a market (and Trump’s) drumbeat for a rate cut. The minutes did point to the limits of tolerance for repeated misses on the inflation target, but in the broader scheme of things, their impact was virtually non-existent (the S&P ended the day almost exactly where it traded when the minutes were released at 2 p.m.). That’s partly because minutes concluded the April 30-May 1 policy meeting, which happened before the latest escalation of the U.S.-China trade war.

Investors will gauge today whether electronics and appliance sales at Best Buy fared better than clothing and home goods retailers after companies from Nordstrom to Kohl’s to J.C Penney posted mediocre earnings earlier this week. Best Buy has been all over the place in the past year, rising to a record in August before losing 42% by December and climbing 43% in the next five months. Signs are good thus far the rally may continue, with shares briefly rising 4% after beating on 1Q and enterprise comp. sales, though its affirmed full year outlook midpoint misses analyst estimates.

Sectors in Focus

Asia-exposed stocks (AAPL, AMD, AVGO, BA, CAT, DE, KLAC, LVS, NKE, NVDA, WYNN) amid signs trade tensions are escalating. Goldman Sachs now sees higher odds of a U.S.-China stalemate, and Nomura Holdings has shifted to forecasting a full-blown escalation of tariffsL Brands soared 13% post-market yesterday after posting quarterly revenue that beat estimates - watch ASNA, CATO, CHS, FRAN, RTW for potential reactionBitcoin-related names like DPW, MARA, RIOT after the cryptocurrency fell near $7,600 line, after closing above $8,000 on Monday and TuesdayWatch software makers like ANSS, AZPN, CDNS, PTC for a reaction to Autodesk’s earnings after the bell

Notes From the Sell Side

Atlassian, a stock that has already posted gains nearing 42% on the year, was on the receiving end of an upgrade from Morgan Stanley today, the analysts of which now forecast sustained 30%+ revenue growth over the coming 5 years. This, as competitor (and pseudo partner) Slack approaches its direct listing next month. “Bull case becomes our base case,” analyst Keith Weiss wrote, moving his rating to equal-weight from the equivalent of a sell. The productivity software provider is “too well positioned to sell, and too expensive to buy,” he writes, describing the the company as “among the great companies in software” due to its skilled management, expanding portfolio of solutions and highly efficient distribution model allowing for growth and margins. The analysts await a better entry point to “get more aggressive” on shares.

The impacts from African Swine Fever (ASF) on companies like Chipotle and the parent co. of Outback Steakhouse are being underestimated, BMO analysts write, downgrading BLMN and CMG to underperform. “Potential magnitude and duration” of ASF to margins is underappreciated, analysts led by Andrew Strelzi wrote, expecting a “meaningful” trend higher in protein prices that may last years. Company-owned restaurant brands are most at risk, they write, as broader protein inflation is seen materializing in the next few months. Other names at risk include TXRH, CHUY, EAT, DRI; least at risk in the space include NDLS, MCD, WEN, YUM and WING. On the flip side, protein companies are seen as beneficiaries, like PPC, TSN and SAFM.

Tick-By-Tick Guide to Today’s Actionable Events

HUM, WHR investor days8:00am -- RY CN, BBY, MDT earnings calls8:30am -- Weekly Initial Jobless Claims, Continuing Claims8:30am -- BJ earnings call9:00am -- LB earnings call9:45am -- Weekly Bloomberg Consumer Comfort9:45am -- May Prelim. Markit U.S. Mfg, Services PMI10:00am -- April New Home Sales11:00am -- May Kansas City Fed Mfg Activity1:00pm -- Fed’s Kaplan, Daly, Bostic and Barkin speak on a panel1:30pm -- TD earnings call4:01pm -- ADSK earnings4:02pm -- SPLK earnings4:05pm -- HPE, HPQ earnings4:30pm -- HPE, SPLK earnings call5:00pm -- ADSK earnings call5:30pm -- HPQ earnings call

--With assistance from Brad Olesen.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Steven Fromm

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